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June 26, 2012

What Now?

After a flat 2011, traders were hopeful as 2012 started out with a strong bullish stock market. The S&P 500 Index grew 13% through the beginning of April. But then the market stalled and basically traded sideways. Then it got really ugly as the markets dropped 8% from May 1 through May 18. Since then, this market has served to confound rather than clearly trend either up or down. On June 1, the S&P 500 dropped $32 or 2.4%, but then, just three trading days later, we watched as the S&P 500 gained $29 or 2.3%. What a roller coaster ride! Personally, I enjoy roller coasters, but I’m not so crazy about watching my account balance lose 2% and then gain it back a couple of days later.

How should we be managing our investment accounts in this environment? What trading strategies should we be using?

Fundamentally, most trading boils down to a simple process: I predict the future price of a stock or commodity and enter a trade that will gain in value if my prediction is true. We refer to this as directional trading. The first step is to determine the trend of the overall market. If I see the S&P 500 is in a bullish trend, then I begin to look for possible stock investments that look bullish. But this process is exceedingly difficult, if not impossible, in the environment we have been living through the past few months. We were about to call this a bear market trend in May, but then it traded up after the low on June 1 and gave us hope that the bullish trend of the first quarter might be resuming. But the past few days have us worried once again. Trading directionally in this market is virtually impossible.

But there is another approach: non-directional trading. Using options, I can establish positions in the market and then simply adjust those positions as the market moves each day. I am now trading based on what the market gives me; I am not making any predictions about tomorrow. Non-directional trading is much less stressful, especially in this market environment.

This is the strategy we use in the Flying With The Condor™. And it works! This service is up nearly 30% through the June option expiration cycle. And it gained 39% in 2011 in spite of the August market crash. Would you like to learn to trade this way? Check out my new DVD series, The Ultimate Options Course.